India: Ready for Basel II -- Survey Findings credit risk preparedness 71% of banks responded that they had made reasonable progress with the initial stages of implementing a credit risk programme. However banks appear to be unclear on their time frames for adopting more advanced approaches. 89% of the banks surveyed indicated that they have a udedicated teamP responsible for Basel II implementation.
India: Ready for Basel II -- Survey Findings credit risk preparedness 71% of banks responded that they had made reasonable progress with the initial stages of implementing a credit risk programme. However banks appear to be unclear on their time frames for adopting more advanced approaches. 89% of the banks surveyed indicated that they have a udedicated teamP responsible for Basel II implementation.
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India: Ready for Basel II -- Survey Findings credit risk preparedness 71% of banks responded that they had made reasonable progress with the initial stages of implementing a credit risk programme. However banks appear to be unclear on their time frames for adopting more advanced approaches. 89% of the banks surveyed indicated that they have a udedicated teamP responsible for Basel II implementation.
Copyright:
Attribution Non-Commercial (BY-NC)
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Download as PPT, PDF, TXT or read online from Scribd
Assessment of Industry¶s readiness ± Survey by KPMG
Opportunities, Concerns and Challenges
What needs to be done to ensure effective implementation and
within the RBI time frame ± Action Points for effective Implementation O
OO Coverage of the Survey
Total 32 banks Total Banking Assets:
9 public sector banks 61% 6 new private sector banks Total Profit (after tax): 12 old private sector banks 68% 5 foreign banks
Key Aspects in the questionnaire
The Drivers Techonological readiness
The Project plan esource Planning Perceivedbenefits andchallenges O
OO
% &
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! " # $ O
OO Other Findings: 16% of the banks surveyed have commenced the process of planning for the more advanced approaches of Basel II, including collection of loss data, risk mitigation techniques and capital modelling. Compliance with regulation is driving the Basel II implementation programme in 46% of the banks surveyed. New private sector banks ranked enterprise risk management over compliance as their key driver. 89% of the banks surveyed indicated that they have a µdedicated team¶ responsible for Basel II implementation. However, very few banks have established the position of Chief Risk Officer with a reporting line to the CEO/Board and whose role has been defined with sufficient clarity. O
OO Credit Risk Preparedness 71% of the banks responded that they had made reasonable progress with the initial stages (in the form of establishing the team, conducting gap analysis, pro ect planning and assessing detailed requirements) of implementing a credit risk programme.
The more advanced stages of credit risk preparedness have
shown minimal progress as well as varied understanding of the implementation approach. O
OO Operational Risk Preparedness Most banks have started work on the Basic Indicator Approach (BIA) for operational risk management. However banks appear to be unclear on their time frames for adopting more advanced approaches. Appropriate guidance from the regulator could be one of the reasons. Technological adaptability could be one of the drivers that would enable banks to implement the Standardised and Advanced Measurement Approach for operational risk management. A large number of banks seem to have not yet fully understood the complexities for Basel II compliance in respect of operational risk. O
OO Technological Preparedness There appears to be less clarity with regard to use of technology in operational risk.
On a scale of 5, Credit risk technological preparedness range
between 3.0 to 3.5, Market risk technological preparedness range between 3.2 to 3.5 and Operational risk technological preparedness range between 2.0 to 2.5 among various public and private sector banks. 90% of the banks intended to use a combination of in-house development as well as external consultants to build appropriate IT solutions. O
Measuring,Managing and Monitoring Risk in a scientific
manner
Align risk appetite and business strategy
Risk Based Pricing
Effective Portfolio Management
Optimum utilization of Capital
Enhance shareholders¶ value by generating risk ad usted
return on capital Õ
Õ
O Guidance and support from senior management is essential to help ensure success of Basel II pro ect. Without their support and motivation, implementation can become difficult and time consuming.
Good risk management involves a high degree of cultural
changes. Embedding good risk management practices into the day to day business processes will be a daunting task.
Sophisticated risk management techniques, particularly under
the advanced approaches, require human resources with appropriate skill sets and proper training. With average age of 45 and above of Public Sector Bank officers, the task becomes much more challenging. Õ
Õ
O Capital requirement under Basel II will increase due to additional capital charge for operational risk and increased capital requirement for market risk (already implemented wef 31.03.2006). The scarcity of resources (of raising capital) will add to the existing competition of business growth. Highly rated corporates (needing lower amount of capital) may exert pressure on already declining interest spread. The models under advanced approaches require lot of historical data. However, with no data warehouses in the banks (especially Public Sector Banks), collection of data is a formidable task. Methodologies that work in a bank may not work in another bank. Banks have to customize and tailor make the risk products to suit their processes. Challenges for Banks ± Legal and Regulatory Infrastructure
Steps are required for adoption of internationally accepted
accounting standards, consistent, realistic and prudent rules for asset valuation and loan loss provisions reflecting realistic repayment expectations. Legal systems will require changes for speedier and effective liquidation of collaterals
The laws governing supervisory confidentiality and bank
secrecy would require modifications to permit disclosure envisaged under pillar III. In view of predominant Government control over public sector banks, preconditions such as operational autonomy, corporate governance etc need to be addressed. Challenges for Banks ± External Credit Rating Agencies
Limited number of rating agencies and insignificant level of
penetration of ratings.
The rating agencies in India have a good background in rating
³issues´ such as corporate bonds, commercial papers and other marketable instruments, but not in rating issuers/bank borrowers.
At present default rates are disclosed by CRISIL only and
other rating agencies are yet to declare the default rates,which may create difficulties in mapping process and compliance with disclosure criterion. Other rating agencies will have to disclose the default rates if they want to be accredited by RBI. Challenges for Banks ± External Credit Rating Agencies
In India banks/ FI¶s are having stake in rating agencies that
may impact the independence of rating agencies. Banks are also awaiting detailed guidelines from the regulator on matter involving regulatory discretion under Internal rating based approach. Such guidelines are required to enable the banks to start collecting the data properly and to design IRB compliant risk management systems.
The capital requirements of banks under Standardised
approach will be less sensitive to credit risk compared to banks on advanced approaches, may result in higher risk loans going to banks on standardised approach. This may lead to concentration of high risk assets with banks adopting standardised approach and low risk assets with banks adopting IRB approach. Challenges for Banks ± evelopment of market for Credit derivatives and other credit mitigation products
Credit derivative products yet to be introduced in India.
Evolution of developed market for credit derivative is required to mange credit risk effectively and to get full benefit of risk mitigation.
Rigorous legal and regulatory framework and less developed
secondary market for bonds/ loans etc is a ma or impediment in development of credit derivative markets. Õ
O
O Presently, no single IT supplier can provide all-round risk management solutions. However, 100% internal development may be too costly because risk management methodologies tend to involve complex computation. Integrating various external systems into one platform is the ma or challenge. Flexible customization of external systems is important .
System integration, dedicated software for risk assessment and
management and setting up of enterprise wide integrated data warehouse shall pose a formidable challenge for Indian banks.
Ensuring correct feeding of data from various sources and the
validation of information stored is a ma or challenge to be overcome before the banks start making use of the information in the data warehouse. Õ
O
O Lack of data driven culture Historical issues in getting reliable data. Only data that was necessary to ease operational processes was captured. Structured, data-backed decision-making has not been very prevalent. Most of banks are having various banking solutions across branches. Co-ordinating with multiple vendors each handling different parts of the overall solution in the present system is a daunting task.
Inadequacy of relevant and reliable data to estimate risk inputs
for advanced techniques ± shall make the implementation difficult in Indian conditions. Õ
O
O
Short data history, and lesser number of data points in LG ,
EA and high impact low frequency events in operational risk may give distorted results. Effort for creation of pooled data are required to be made requiring collaborative efforts between banks and supervisor.
Risk methodologies and business processes are evolving. The
technologies adopted must be flexible for future changes.
! O
Grooming and Retaining Talent Percolating risk culture across the organisation through frequent communications, organizing seminars and training.
Setting up of ata Warehouse to provide risk management
solutions.
Integrating risk management with operational decision making
process by conducting periodic use tests.
Periodic backtesting and stress testing of the existing models to
test their robustness in the changing environment and make suitable amendments, if required.
! O
Putting in place a comprehensive plan of action to capture risks not captured under Pillar I, through ICAAP framework.
Handling interrelationship between businesses. Linkage needs to
be established between Funds Transfer Pricing, Asset and Liability Management, Credit risk, Market risk and Operational risk so that cost allocation can be done in a scientific manner.
For Pillar III requirements, banks should disclose information,
that are easily understood by the market players and gradually move to disclosure of informations requiring advanced concepts and complex analysis. Adopting RAROC framework and moving from regulatory capital to economic capital.
(Comparative and international education (Sense Publishers) 41) Accioly, Inny_Leher, Roberto - Commodifying education_ theoretical and methodological aspects of financialization of education policies